Looking for leaders

Commentary: Dimon, Geithner and Paulson have proven their mettle

DavidWeidner

NEW YORK (MarketWatch) -- Heroes are made not in the best of times, but in times of trouble, when things look bleakest. Courage is the guts to do something even when fear and risk tell us otherwise.

The credit crisis on Wall Street in the last 12 months has provided us with a rigorous leadership test. Not many have passed, but a few have scored well. Three officials stand out as leaders who, though they made mistakes, have avoided the pitfalls.

They've put their personal reputations at risk trying to make a better Wall Street.

Dimon's deal

In the private sector, no chief executive has had more expectations thrust upon him than Jamie Dimon, the chairman and chief executive of J.P. Morgan Chase & Co.
JPM, -1.56%

Dimon, who did not follow his counterparts by buying heaps of risky collateralized debt, could have been content to ride out the credit crisis. J.P. Morgan has reported $9.8 billion in write-downs stemming from the subprime mess. On a relative scale the losses are smaller than those seen at other firms. Even if he had done nothing but sit back and ride out the crisis, Dimon still looks like the smart guy in the room.

Instead, Dimon has been central to the solution. By agreeing to buy Bear Stearns Cos. in March, the 56-year-old executive spent his own capital with shareholders. His promise to them was that J.P. Morgan would be better off after the acquisition even though the company was absorbing balance-sheet risk and a lot of unknowns.

Time has yet to prove him right on that gamble, but the help to the economic system is incalculable. Without the deal, a Bear Stearns bankruptcy would have crippled the credit markets and possibly set off a domino effect as nervous counterparties abandoned big banks and sent them into liquidity crisis.

Dimon also gets extra points for not being a shrinking violet. He was the only major private banking figure to appear on Tuesday at a mortgage conference sponsored by the Federal Deposit Insurance Corp. During his speech there, Dimon squarely blamed big banks for building toxic securities that are the culprit in the credit crunch. He also defended accounting rules that require banks to write down worthless assets.

In doing so he indirectly criticized one of the Street's biggest clients, Blackstone Group L.P.
BX, -1.77%
Chief Stephen Schwartzman.

Geithner's guidance

Dimon probably would never have touched Bear Stearns if not for the influence of Timothy Geithner, president of the New York Federal Reserve, largely unknown outside of the community of money center banks.

It was Geithner who orchestrated a plan to back Wall Street obligations by opening the discount window to investment banks and who guided the 72 hours of talks that led to the emergency sale of Bear Stearns.

Geithner, along with Fed Chairman Ben Bernanke, uprooted what had been seven decades of financial policy in the U.S. markets by stepping across the line that divided commercial and investment banks.

Breaking the taboo, however, has been no lay-up. The Fed has taken a great amount of flack. Vincent Reinhart, a former Fed staffer, called the Bear move "catastrophic."

If so, the moves also have come at a price to Wall Street interests. Having put taxpayers at risk to save the system, Geithner has been aggressively pushing the Federal Reserve's influence in how investment banks deal with risk and leverage. In early June he called a meeting of 17 financial institutions to propose solutions. Geithner's message is simple: We need you, so we saved you, but you're going to have to live by our rules.

Paulson's plan

Those rules aren't coming from Geithner alone. When Bernanke was credited Tuesday for proposing broader powers for the Fed, it was Treasury Secretary Henry Paulson who he was channeling.

The Treasury chief has proposed expanding the powers of the Fed and reducing or combining other regulators such as the Securities and Exchange Commission and Commodities Futures Trading Commission.

Barack Obama, who will be the Democratic nominee for president, complained that the plan lacked tougher controls. John McCain, his Republican counterpart, said easing the financial pain of Americans was a more immediate need. Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee liked it, save for a few details.

Paulson's plan for a regulatory overhaul was presented late March, and while Bernanke has differed with the Treasury secretary on details, such as how involved the Fed should be in the day-to-day workings of commercial banks, the two leaders are the primary drivers of regulatory reform. Paulson was the first to cross the line with a specific proposal.

Paulson's plan isn't perfect, but it's a start, and a lot tougher than many might expect from the former chief executive of Goldman Sachs Group Inc.
GS, -1.86%
who is likely to step down in January.

The others

While Paulson is pushing for policy changes, SEC Chairman Christopher Cox seems content to wait and follow the leadership of others.

Cox wasn't a direct participant in the talks to save Bear Stearns, even though it fell under SEC regulation. He's blocked federal inquiries into the commission's tactics in regulating collateralized debt. He's been largely silent even as some questioned the worth of the SEC.

Bart Chilton, chairman of the Commodity Futures Trading Commission and who may just have stepped out of a time capsule buried a couple of years ago, said Paulson shouldn't try curing "what isn't sick."

In the private sector, we've seen equally sad displays from Dick Fuld at Lehman Brothers Holdings Inc.
LEH
Jimmy Cayne at Bear and John Mack at Morgan Stanley
MS, -2.00%
All three of them sought to buy time and deflect criticism by firing their No. 2s.

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